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Wednesday Technical Update: Euro Still Fragile.

‘The Dow was up 21 points today as confirmation of yesterday’s 200 point move higher in equities. The US has decoupled from the world both in terms of economic data such as PMI and equity prices. The US stock market has been able to decouple from financials for over two years. The US stock market is decoupling from the EUR. The EUR is due for a massive short squeeze because non-commercial traders are net short’.

That pretty much sums up the nonsense headlines out there. By nonsense I mean false and meant to lead you to believe all is well. A simple glance of the SPX wedge playing out since the July 2011 highs shows a clean breakout while the AUD/USD reversed off the lows and closed down just .1%. Certainly sounds bullish right?

If that is where you are looking you are missing the big picture. The internals of this market have begun rolling over and I am no longer limiting this conversation to credit products which continue to diverge or commodities which are well past their highs. Within the equity market there is a clear sign of exhaustion.

Since late October the mid and small cap both futures and cash are simply underperforming the market. In fact on a closing basis they have failed to take out the October and December highs.

Yesterday saw the Mid Cap futures put in a massive reversal and a very uglier reversal candle on the daily chart. Today they confirmed that price action as did the RUT futures. The SPX futures on the other hand are sitting on a massive gap from Tuesday and like the SPX appear strong but they are not.

SPX – One Year Daily – notice the wedge “breakout.” Look at the other three patterns that have failed to break out.

Mid Cap Futures – One Year Daily. Very bearish when you look at the various patterns and the relative under performance. The larger head and shoulder’s neckline has not been retested after the first failure. The various wedge patterns, ascending triangle and inverted head and shoulders have all had false breakouts to the upside increasing their probability of breaking lower.

The currencies put in rather large reversals today taking back the entire move of Tuesday. The EUR has now been clearly rejected by the 2005 up trend line and sits just 100 pips away from the December lows and 150 pips away from major support which would set up a test of the summer 2010 lows of 1.20.

As for that nonsense about non-commercial traders being short when commercial are long whoever writes that stuff should realize that is how the market works. Non-commercial takes the other side of the trade just as a market maker takes the other side of your trade.

Remember the short EUR, long USD trade is not based on technicals but a real fundamental driven supply and demand imbalance.

Bottom Line

The US has not decoupled from the world including the capital markets and global economy. The equity market cannot decouple from financials and materials. The US equity market is not decoupling from the EUR. The EUR and USD are not technical trades here but fundamental ones.

Housing is oversold but home prices will remain depressed for years until the supply demand imbalance is eliminated. Think of the USD in the same light. Tomorrow brings some big auctions in Europe and based on the performance of non US credit investors are not anticipating much success. Remember, the EUR has very little room to the downside before taking out a major level of support.

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